How The Fed's Latest QE Is Just Another European Bailout

Tyler Durden's picture

Back in June 2011 Zero Hedge broke a very troubling story: virtually all the reserves that had been created as a result of the Fed's QE2, some $600 billion (which two years ago seemed like a lot of money) which was supposed to force banks to create loans and stimulate the US (not European) economy, ended up becoming cash at what the Fed classifies as "foreign-related institutions in the US" (or "foreign banks" as used in this article) on its weekly update of commercial banks operating in the US, or said simply, European banks.

And while many, primarily the British press, demonstrated how simple it is to confuse cause and effect, and suggested, incorrectly, that the surge in cash was due to arbing the Fed's IOER (it wasn't, as otherwise all excess reserves would have migrated to European banks due to the open-ended arbitrage instead of merely tracking the ebb and flow of the Fed's reserves), what we showed was that there a one to one correlation between the surge in foreign bank cash assets courtesy of the Fed, and the EURUSD exchange rate, a proxy for European stability, not to mention a key signal for virtually every ES correlation algo.

As the chart above shows, there was a clear and definite correlation, if not causation, between the $500 billion that the Fed added as cash to European foreign banks, and the nearly 2000 pip move in the EURUSD, at which point everyone was pronouncing the European crisis over. It also resulted in a wholesale surge in risk assets. Just like now (incidentally, a topic we covered last night).

So with the Fed's open-ended QE in place for over 3 months now, or long enough for the nearly $200 billion in MBS already purchased to begin settling on Bernanke's balance sheet, we decided to check if, just like during QE2, the Fed was merely funding European banks' US-based subsidiaries with massive cash, which would then proceed to use said fungible cash to indicate an "all clear" courtesy of Bernanke's easy money. Just like in 2011.

The answer, to our complete lack of surprise, is a resounding yes.

* * *

First, some basics.

While there is much theoretical confusion over what excess reserves are, which are merely the fungible cash-equivalent liabilities created on the Fed's balance sheet whenever Ben Bernanke has to monetize the US deficit by purchasing Treasurys or MBS, and thus needs to create offsetting money-equivalent liabilities, especially by academics whose only job day and night is to debate endlessly just what constitutes "money" as their value added in any other field is negative, from a practical standpoint the answer is and has always been one and the same. Cash.

And because there is always confusion on this matter, especially by the monetary intelligentsia-cum-philosopshers club, here is the evidence. Excess reserves = bank cash. Bank cash = excess reserves.

In the chart above, the black line is the surge in Fed excess reserves since September 2009 (source: St Louis Fed), while the shaded area chart shows the break down of bank cash between small domestic, large domestic commercial banks and foreign banks (source: H.8). The two are identical.

So that should remove any of the the confusion of where the the Fed's main de novo created liability ends up as an asset on commercial banks operating in the US - both domestically-chartered and foreign ones.

But the focus of this post is the foreign banks. And it is foreign banks that have seen their cash soar by some $207 billion in the past four weeks (and $216 billion using not seasonally adjusted numbers). This is the second highest monthly surge into "foreign-related" institutions since the bailout of AIG, and is even more on a running 4-week basis than the maximum $171 billion posted in the spring of 2011 when the Fed was injecting some $500 billion into foreign banks as well.

Another exhibit showing just how generous the Fed has been to foreign bank is a chart of cash compare to all non-cash assets. After nearly hitting 100% as a result of QE2, the ratio has once again soared from 60% to just over 80% in the span of four weeks, or since the settlement of MBS monetizations started hitting the Fed's balance sheet.

Perhaps all of this soaring cash is merely the result of a massive inflow of deposits (a liability) into foreign banks without a matching increase in loans (the much discussed previously excess deposits over loans topic), which only leaves cash? The answer is no, as excess deposits over loans at foreign banks has kept flat over the past year, at between $200 and $300 billion.

And in case the big picture is still not obvious, here is the chart that ties it all together: a comparison of the spike in Fed excess reserves and the cash held by foreign banks. Thank you open-ended QE, and Fed Chairman, for injecting over $200 billion in US Dollars into foreign banks operating on US soil.

What is interesting about the chart above is that while cash and small domestic banks has barely budged since 2009 and has been flat at just over $200 billion, and that cash at Large US Domestic banks, or those that hold the bulk of US financial assets, has also been relatively flat in the $500-600 billion area, it is the foreign banks that any new incremental reserves created by the Fed always inevitably end up at ever since QE2.

As shown above, cash held by foreign-related branches operating in the US has surpassed that of domestic banks only for the fourth time in history, the first being the end of QE2 when Europe was again "fixed" (just before it broke), the second was just before the coordinated central bank bailout of Europe in November 2011, the third was May 2012 just before Spanish spreads soared to record highs, and now.

With all of the above, anyone who was wondering where all those hundreds of billions in Fed cash created out of thin air were going now knows the answer: straight into the coffers of mostly European banks operating in the US.

* * *

The only answer that is still missing is precisely what these foreign banks are using said cash for. Because remember that as JPM's CIO showed, a bank can "indicate" it has cash on its books, when in reality it is using said fungible asset for anything: funding one's prop operations, including selling IG9 CDS in a borderline illegal attempt to corner the entire corporate bond market. Or it can perhaps buy the USDJPY, in the process sending the Nikkei soaring and "indicating" that Abe's reflation plan is working. Or it can simply buy the EURUSD as it did in the spring of 2011, crushing the USD and sending the S&P500 soaring, as can be seen on the chart below showing the correlation between the cash on foreign banks and the recent surge in EURUSD.

And while we are confident that the "British press", which is now reliant on Wall Street banks to help it find the highest bidder to which it can sell itself, will promptly come up with contrarian theories all of which will be wrong as they were in 2011, the reality is simple, and can easily be tracked in real time.

We urge readers to check the weekly status of the H.8 when it comes out every Friday night, and specifically line item 25 on page 18, as we have a sinking feeling that as the Fed creates $85 billion in reserves every month to offset its other key task - the ongoing monetization of the US deficit, it will do just one thing: hand the cash right over straight to still hopelessly insolvent European banks to push the EURUSD higher, until, as in the summer of 2011 it goes far too high, crushes German, and any other net European exports, and precipitates yet another wholesale bailout of Europe by the global central bankers. Just as the Fed did in 2011.

Because remember: it is never different this time.

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new game's picture

maybe with critical thinking and basic econ 101: usery as a violation of law is "not such a bad idea"...

called cash and carry - no credit here!

but of course then the usery would be burried in the price as visa has enforced via 90 percent compliance.

cash is da king till the king is no longer king

but this wise king ordered the loyal to roam the countryside, and plunder gold by death or otherwise...

and the story goes on.

when the govmnts begin to print and directly buy gold, the fiat end is near(max da mouth).

Ghordius's picture

"the fiat" has always an end. history is full of fiats that were born, thrived and died. at the end "a fiat" is nothing else than a moral pact

All Risk No Reward's picture

Except the fact your "cash" is lent into existence and accrues interest to someone.

Unless by cash you mean "coins," which are debt free.

All Risk No Reward's picture

So, if someone says critical thinking is important, you shut down your thought processes because that's a magic word for anti-critical thinking?

Oh, I get it.  You are adverse to critical thinking because it makes you ill or something.

Well, that makes sense.

If you ever get over it, though, search "trivium binder" and go to the audio section to listen to some podcasts on the Trivium.

Also learn the various fallacies that are used to manipulate people.  Search 42 fallacies and learn a few a day.

Then you will know you actually have to listen to an argument in order to gauge the data, the context and the logic used in the argument, you can't simply take the simple minded way out and have a chance to understand reality.

All Risk No Reward's picture

You have been victimized by the poison the well fallacy.

Much of Econ 101 is about humans engaging in a cost/benefit analysis in order to make decisions.

That principle is sound.

Just because criminals and useful idiots misapply it or manipulate it or create nonsense macroeconomic theories does not mean the baby should be thrown out with the "bath water," as it were.

Econ 101 has some excellent course material if you understand it.  I actually apply its principles in my effort to expose Big Finance Capital shill "economists" as frauds.

Ghordius's picture

"mostly foreign owned mega banks"? Interesting thought. but irrelevant, because the "foreign devils" have no power of legislation over the megabanks, not de facto

the laws that make this global phenomenon called megabanks possible are made by the US Congress and signed by it's president

mainly by deletion of existing laws that previously forbade them

nevertheless I'm not so sure if hyperinflation kills 'em - it never did, before

All Risk No Reward's picture

1. They control legislation via the financing and promoting of their political operatives.  Nobody else can compete because nobody else has the ability to lend to governments.  Stop thinking linearly.

2. You don't understand the context.  When countries are hyperinflated in their own currencies, the international banking cartels actually see deflation from the standpoint of the currency they control.

In Argentina, for example, the people expe3rienced hyperinflation, but people with dollars (the international banking cartel) were able to buy stuff up for PENNIES ON THE DOLLAR.

Stop thinking like a peasant looking up and start thinking like a financial oligarch looking down.

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”? Napoleon Bonaparte
tarsubil's picture

Hyperinflation kills them? Who do you think is going to be handed all the new cash? You and me? Hahaha!

All Risk No Reward's picture

After serfs pay their debts with bread crumb money?

I don't think so. 

Rather, they will bust society first, asset strip society, then hyperinflate when when they are "all in" when it comes to hard assets.

Society's hard assets.

They aren't giving out 30 year loans at 3% ahead of creating a massive inflation.

Money is debt and society is debt saturated.  End "mark to myth" for the criminal syndicate and credit and monetary aggregates are deflating, not inflating.

Even with mark to myth they are barely above the previous 2007 high.

You are observing previous inflation slosh and not new monetary and credit aggregate inflation relative ot the 2007 high.

Price inflation is a symptom.  I look at root causes.

Rainman's picture

The Fed's teet is probably the reason European banks won't sell their US operations, despite a lot of buying interest from other foreign banks. Printed fiat makes for odd bedfellows.

RebelDevil's picture

Yet another jaw-droping article by the tyler(s).

TheFourthStooge-ing's picture


Yet another jaw-droping article by the tyler(s).

But, but, but the Fed says that "writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy" and that the general public "are simply being had by the bulk of the economic blogging crowd."

RebelDevil's picture

smh ... now I know why we're called "conspiracy theorists". - The bastards destroyed the surface credibility of "Truth seeking".

All Risk No Reward's picture

Only in the minds of the chumptocracy.

Those same people run and hide when I drop conspiracy fact in their lap...

Debt Money Tyranny

One guy, who says that the banks didn't commit any crimes (and got livid when I told him about the Citibank executive that said, under oath, that 80% of the mortgages didn't meet represeantation - clear criminal fraud), told me, "I'm not going to look at that chart.  You don't make me feel good."


Spread the word - there is no debate...  so long as the observer understands 5th grade math concepts.

RebelDevil's picture

"I'm not going to look at that chart. You don't make me feel good."
and that's exactly why 2/3 of the population drink the cool aid. They would rather feel good than know the truth. So they're out of the game. It's the thinkers that we need to spread the word too, as they are the real truth seekers here.

And I'd say that this statement doesn't just apply to the economic crisis, but to everything (and most apparently in regards to religion).

RockyRacoon's picture

Many of these folks just can't handle the truth.  Denial is a very useful tool.  It keeps one from having information that would drive them over the edge.  If you don't see the boogeyman, he ain't there.  This works for those at all levels, whether the regular voter trying to do what he conceives as the right thing, to the banker who believes he is doing god's work, to the elected official who believes that he/she is acting in the best interest of constituents and personal values.  One has to hit bottom before denial can be overcome.  Unfortunately, the bottom in this case is the crashing of financial markets, social structures, and basic morality.   Too sad.

smart girl's picture

Actually one does not HAVE to hit bottom, right? The truth is alienating at the moment, I agree.

1C3-N1N3's picture

"Smart" people pride themselves on devoting at least a decade or so to formal, specialized study aimed at (mis)understanding human behavior, while everyone else has it down intuitively before middle school.

gadzooks's picture

Lol ,and inovating from it by the age of 20......good one 1C3....the poor culted people.....

Ricky Bobby's picture

Hey Fourth, fuck the PHD, I hold the honary degree of ZHD.

bobthehorse's picture

Ben Bernanke fears deflation like a vampire fears a crucifix.

The collapse of Europe would be a huge deflationary event.

Oil would crash.

Stocks would crash.

Commodities would crash.

So he's gonna do all he can to keep the Titanic afloat.

All Risk No Reward's picture

That's the establishment narrative.  You do know what a narrative is, right?

Bernanke isn't afraid of deflation, he's afraid of crossiing Biggest Finance Capital and getting rubbed out.

What does Big Finance Capital want?

1a. Their trillions in cash holdings and debt holdings wiped out in hyperinflation?

1b. Those 30 year loans at 3% being paid off with 2 loaves of bread?

2. The chance to buy up the world for pennies on the dollar?

Do tell us...

The reason they havn't busted us yet is because they are looting us ahead of the big bust.

They are offloading $45 trillion in their toxic debt to the Fed on its way to the tax payer every month...

Hey, if we are that stupid...  or, if they can psy-op us into thinking the debt will be inflated away...

They meet every few months and ask, "are the stupid enough to let us steal $10s of billions from them?"

If the answer is yes, they keep doing it.  When that answer becomes no, KATIE, BAR THE DOOR.

Ahhhhh, is the light bub now on?

Debt Money Tyranny

bobthehorse's picture

Ben Bernanke fears deflation like a vampire fears a crucifix.

The collapse of Europe would be a huge deflationary event.

Oil would crash.

Stocks would crash.

Commodities would crash.

So he's gonna do all he can to keep the Titanic afloat.

RebelDevil's picture

He fears it so much, that he in fact creates it.

deKevelioc's picture

We heard you the first time.

ebworthen's picture

Another reason to avoid paying taxes to, or supporting the market casino of, the U.S.S.A. Kleptoligarchy (a.k.a. - International Banker Plantation).

All Risk No Reward's picture

A kleptocracy perched atop a chumptocracy.  Yep, got that.

Now I want a word for "people who think their enslavement is freedom and Stockholm Syndrome is a given."


chubbyjjfong's picture

So by injecting the the funds directly to foreign banks, the Fed not only can indirectly instigate the bailout of European Sovereign Banks, it can screw their EU currency higher at the same time aiding the income of massive US export corporations.  The Fed looks like a god dam hero in Europe and a saint to US elite Corporate, who get all their shit made in China anyway.  It just gets better and better. Meanwhile the middle class is just ignored to stew in their own shit. YAY!  Do I need to add the SARC/ button?


edit.  Agreed, excellent article Tylers, great information.

CH1's picture

Meanwhile the middle class is just ignored to stew in their own shit.

As long as the overlords, enjoy complete obedience, why should they change anything?

Tsar Pointless's picture

Incredible work, Tyler Whoever.

I had some person on HuffPo tell me that it is Harvard endowments and Pension funds pushing the stock markets toward new highs, NOT banks.

Some of us will get it, others won't, until they "get" it.

Stuffs And Stuff's picture

Oh, they'll get it alright. I can only imagine what their faces will look like when they finally realize.

Yen Cross's picture

 Do we really need to explore ( Reverse Repos) again? Tyler?

Stuffs And Stuff's picture

In USSA, bank robs you!

Banksters's picture


Fed extends aid to foreign banks The Federal Reserve, along with four other central banks, announced Thursday that it will extend a program that keeps borrowing costs cheap for foreign banks that want to deal in U.S. dollars.

Last year, the Fed slashed in half the rate that foreign central banks pay to borrow U.S. dollars, a staple in global financial transactions.

The so-called dollar liquidity swaps are basically credit lines to foreign central banks. It's a tool that has been extended and revived several times, to lower the cost of short-term borrowing, particularly for European banks, and keep the global economy free of a credit crunch as in 2008.


Ben has his lactating money tits ready for any bankster that needs it.






DangerClams's picture

Now I understand what Berspankme means when he says he feels "let down" - it's the milk that spontaneously flows from the afore-mentioned teats, that instantly start leaking whenever an EU banker cries.

Not that I want to envision those hairy sway-paps, but someone else brought it up.  I can only gouge my eyes out so many times.

Pure Evil's picture

If eye gouging doesn't work, then a lobotomy certainly will.

Handful of Dust's picture

<< The only answer that is still missing is precisely what these foreign banks are using said cash for.>>


I hear private Swiss bank accounts are Fatter then ever.


Bravo Zulu to the author of this's excellent!

RebelDevil's picture

Actually I literally just remembered Graham Summer's (Phoenix Capital Research) posts from the summer. He was right! - Europe would have collasped by the end of september IF the Fed DID NOT start QE3.

So apparently QE3 "saved" the Euro. (At least this time around.)

Michelle's picture


If the Fed "owns" the European banks and the European banks are holding the Eurozone and its citizens hostage, and with Germany the only European country that is helping to support the viability of the Euro, from a NWO perspective, WHAT THE HELL ARE WE WAITING FOR? Does this mean the Eurozone is a U.S. territory now?

samsara's picture


Both The US and Europe are owned/controlled by the CB's.

The CB's of course are the sole stock holders that OWN the Fed.

The CB's are OWNED by the Rothchilds, Walburgs, Rockefellers, et al.

The Fed will do what it's OWNERs tell it to do.

Exclamation Point.
End of Story

All Risk No Reward's picture

Of course, the same people own the major banks and corporations throughout the world...  all working as subdivisions for the criminals mentioned above.

Don't forget the Transylvanian/German "Queen of England" and "my wealth is national security" Queen Beatrix.

I think that is "Warburgs".

The Shadows of Power: The Council on Foreign Relations and the Decline of America

The American Republic is already a gutted corpse.  All that remains is an illusiono and rapidly wearing off pain medication.

The international banking cartel wants to be soverieng (diplomatic immunity) and rule the world above nation states filled with serfs.

The collaborators who are making this happen think they will be given special privileges that come from serving their masters.

For a time, sure.  But in the end...  they will be surprised that they get what they deserve from these criminals.

The monetary system is a debt based fraud engineered to systematically and covertly asset strip entire nation states.

Debt Money tyranny - The Art of War implementation of a Trojan Horse ("war is all about deception")

Whenever the bankster financed and controlled media promotes a candidate - that needs to be the kiss of death to that candidate.

samsara's picture


You Got it.

Everything else is a Secondary, Tertiary, quaternary, quinary, senary, septenary, octonary, nonary, and denary

and so on down the line.

Down from Rothchilds, Queen Beatrix, and the other past aristocracies on their path to reclaim their rightful place as the rulers of mankind as they see it.

smart girl's picture

Nice. Quinary (base-5) is a numeral system with five as the base. 

Did you check out the lastest from our friends at ECI

Ghordius's picture

samsara, the FED is "owned" by the so called "Primary Dealers", which are privately (through stocks) owned banks, not central banks

most "central banks" worldwide are in fact national banks, i.e. owned by the state - example: The Bank of England

the Rothschilds, Walburg, Rockefellers, etc. were the original owners of banks that served as "Primary Dealers"